Rivian – Field of dreams.

Dreams trump arithmetic for now.

• Rivian is coming to market at $78 a share giving it a valuation of $77bn despite not having sold a single vehicle.
• Furthermore, no one is even bothering to discuss unimportant issues like revenue or cash flow preferring instead to rely on the “dreams” that are being sold by the management and its advisors.
• These “dreams” rely entirely upon Rivian emulating the returns that Tesla shares have delivered despite the fact that these returns also defy reality.
• The issue here is quite simple in that the driver of Tesla, Rivian, Lucid, and much of the rest of the EV industry is a flow of funds story.
• As a result of the Federal Reserve continuing to print money and artificially suppress interest rates, the world is flush with cash looking for yield which cannot be found in the bond market.
• For example, the 10-year US Treasury note currently yields 1.45% per year, and with inflation at 5.5% (could easily be more), this means that the government will pay an investor back just 66% (in real terms) of what it borrowed at the end of the 10 years.
• This is why no rational investor would put his money in the bond market and why the equity market is flush with cash which has driven indices and valuations to all-time highs.
• This is also what has underpinned Tesla’s meteoric rise as the market also has the impression that Tesla is part of the carbon-free movement.
• Tesla cars do not pollute directly but the vast majority of the electricity they consume has been generated using fossil fuels.
• Furthermore, due to the weight of the batteries they carry, EVs also go through tires faster than petrol vehicles thereby increasing “rubber pollution”.
• This is exactly the same issue that currently plagues hydrogen as an alternative fuel source.
• I have no doubt that EVs are the future as they will be much cheaper to own and much more fun to drive but I do not think that Tesla will end up with over 50% of the global auto market which is what the current share price demands.
• However, this has not prevented excessive liquidity from chasing the hot theme of the day which is the only reason why Tesla trades at the level that it does.
• The situation with Rivian is exactly the same and because no heed is being paid to arithmetic, the valuation of this company will be entirely determined by the flow of funds.
• The beautiful part about investing on the basis of arithmetic is that the numbers will at least give one an indication of when a stock has run too far and it is time to sell.
• Flow of funds and a narrative give no such indication and at some point, these stories will simply run out of road and arithmetic will reassert itself as the driver of the share price.
• This is exactly what has happened to Peloton which is still falling on very large volumes of shares being traded and is now 70% below its January 2021 high.
• Rivian has an excellent product that has been very well received by the tech crowd but it has received mediocre reviews from those that review trucks for a living.
• This means that Rivian is a lifestyle product and unlikely to replace the Ford F-150 which is the world’s best-selling vehicle and the workhorse of the USA.
• Furthermore, my cursory scrutiny of Rivian’s technology did not find anything that anyone else does not have and as a result, I am not really sure what makes Rivian so special beyond some very innovative lifestyle features (easily copied) that it has put into its vehicles.
• With no sales in the market, the Rivian team is also untested at the hardest task of all which is achieving scale, and Rivian needs to do this in spades if it ever hopes to grow into the valuation currently being attributed to it.
• By contrast, there are other car makers out there who know exactly how to make millions of vehicles and do so year after year but the shares of these trade at 0.5x EV / Sales.
• Rivian is trading on more than 50x 2022 EV / revenues creating quite a contrast.
• Hence, there will be almost no bottom to the shares when the market decides that the dream is not going to materialise and that Rivian should trade more in line with its peers.
• I would own the traditional carmakers (who all have credible electric vehicles in the works) over this any day of the week.